Global Trends Cause Economic Concern, UK Resilient

Cook: So, last time we spoke was three months ago and we were talking about the eurozone in particular and you reeled off this long list of potential risks that could weigh on the economy. What's changed in those last three months since we spoke. 

Garcia-Zarate: So, what's changed is that those risks have actually materialised and what we are facing now is a potential situation where the eurozone may actually fall back into recession. Germany is actually a problem now, because the slowdown in emerging markets is casting a dark shadow over the export potential of the German economy which is the key engine of the German growth. So, it's no longer just the case of peripheral economies versus core, it's actually the whole area actually suffering from global trends. 

Cook: And so, obviously, the eurozone and UK have close trading ties and Germany in particular… 

Garcia-Zarate: Yes. 

Cook: …is this ‘R’ word, the ‘recession’ word that you've just named there, is that potentially going to start coming back into the headlines for the UK as well? 

Garcia-Zarate: Well, there is a worry that anything that happens in the eurozone will obviously have an impact on the UK because of the links. I mean, no economy is isolated anymore. The "positive aspect" of the UK is its strong reliance on the domestic demand side of the equation and that continues to do fairly well. The labour market in particular is very resilient. And the consensus is that the UK, even accounting for a potential downscale of growth expectations in the eurozone and globally, will continue to top the growth league for this year and next. 

Cook: Okay. So, there's definitely some negative news around the eurozone, but it's not all doom and gloom for the UK. But if I was to push you to name a key theme that you've seen in the last three months since we last did our economic review, is there one thing that you would highlight? 

Garcia-Zarate: I think that we've gone from highlighting risks very specific to regions such as the eurozone to being concerned about the global economy. We're talking about the Chinese slowdown, we're talking about the American economy doing relatively well but sending mixed signals that concern investors. So, it's no longer a case of specific regions. I think we are actually talking about the global economy now. 

Cook: And so what does that interdependence, the connectivity between the global economies, mean for the investor? What do they need to be aware of over, let's say, the next three months before we next speak? 

Garcia-Zarate: I think it is pretty obvious that growth expectations have been downgraded across the globe and that's been reflected in the performance of the equity markets so far in October, which hasn't been – that's been pretty negative actually. But amongst all this negativity, there is some reason for, let's say, hope because there are potential solutions out there and it's just a question of sort of like waiting, I am afraid, to see whether the interested parties are willing to put their solutions into place. 

So, far example, in the case of the eurozone, if the export component is not responding that well, obviously that needs to be substituted with something and that's domestic demand. So, we need perhaps Germany to be more flexible about stimulating consumption and domestic investments and that's going to be what we will be looking for in the next two, three months to see whether that actually takes place. 

Cook: Well, we'll obviously be watching that very closely over the next three months and we'll talk again in January when we will be able to look back, we'll have a better idea of what's been going on and hopefully, you will be able to tell us that early 2015 brings some more reasons for optimism. 

Garcia-Zarate: Well, hopefully. 

Cook: Jose, thanks very much for joining me. 

Garcia-Zarate: Thank you. 

Cook: For Morningstar, I'm Holly Cook. Thanks for watching.